Rising inflation, dollar demand by importers keep rupee weaker

Might weaken moreas month-end dollar demand gets stronger, say dealers

The rupee weakened against the dollar on Monday as month-end dollar demand from importers swept in. Besides, a rise in Wholesale Price Index (WPI) inflation for June signalled that scope for a repo rate cut later this month in the first-quarter review of the monetary policy is limited. The rupee opened at 59.93 a dollar. During intra-day trades, it touched a high of 60.08 and a low of 59.77 before closing at  59.90. The rupee had ended at 59.63 a dollar on Friday.

“Month-end dollar demand has begun, which is putting pressure on the rupee. WPI inflation inched up in June which means Reserve Bank of India (RBI) might not cut the repo rate this month,” said the head of treasury of a public sector bank. Currency dealers are of the view the rupee might weaken further from current levels as month-end dollar demand gets stronger. On Monday, there was dollar demand even for payment of government debt, said dealers. Earlier this month, the rupee touched an all-time high of 61.22 a dollar. The currency, however, recovered as RBI sold dollars through public sector banks.

RBI data released last Friday showed total reserves fell by $4.5 billion to $280.2 billion in the week ending July 5. During the week, foreign currency fell by $3.2 billion to $252.1 billion. According to dealers, this is because the central bank has been intervening in the market to arrest the fall in the rupee and fresh inflows are not coming in to compensate for the dollar sale by RBI.

Wholesale prices rose 4.9 per cent in June from a year earlier, on the back of rising food prices, compared with a 4.7 per cent increase in May, official data showed on Monday. Market participants, however, said the rise might be temporary as the monsoon is normal this year.

“We see the recent food price spike as temporary and expect pressures to subside in coming months, aided by a normal monsoon and a healthy harvest. If food prices stabilise in the coming months, as we expect, this should drive the inflation trajectory lower once again as underlying demand side inflationary pressure continues to be weak,” a Deutsche Bank report said.

On Friday, after market hours, two important data points were released. The Index for Industrial Production (IIP) for May contracted by 1.6 per cent compared with a growth of 2.3 per cent in April while Consumer Price Index (CPI) inflation inched up to 9.9 per cent in June versus 9.3 per cent in May. The rise in CPI is seen as a concern by the Street.

The rise in inflation resulted in bond yields rising. The yield on the 10-year benchmark government bond 7.2 per cent 2023 rose marginally to 7.6 per cent, compared with Friday's close of 7.5 per cent. The repo rate currently stands at 7.3 per cent and during this financial year, it has been cut only once by 25 basis points in May.

“Elevated CPI inflation for June, in conjunction with rupee weakness, might prompt RBI to stay put in the July Policy Review, despite the depressed growth outlook. As such, we expect RBI to maintain status quo in the July Policy Review,” YES Bank said in a research note. According to a government bonds dealer with a public sector bank, government bond yields would rise further this month as RBI is expected to maintain status quo on key policy rates on July 30.

The rise in yields might affect the treasury portfolio of banks, said dealers.